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Understanding Merchant Processing Fee Structures

Depending on your business and what cards you take, the proper fee structure can make or break your monthly processing bill.  There are three main fee structures: Flat Rate, Interchange Plus and Tiered Pricing .

Each fee structure has its own advantages and disadvantages.  Depending on the card types you take, certain processing fee structures can either hurt or help your business.

Let’s dive into the 3 main fee structures and if they are a good fit for your business.

Flat Rate

Flat-rate processors, such as Square, apply a flat-rate to all card present transactions regardless of the card type.  These rates normally range from 2.65% to 2.75% and $0.30 per transaction for all face-to-face debit and credit card transaction.  Card-not-present transactions such as phone orders or keyed in transactions are normally 0.75% to 1.0% higher due to the inherited risk.

In most cases, flat-rate pricing is more expensive per-transaction than the other fee structures discussed below.  However, a good number of flat-rate processors have eliminated additional account fees which can be an interesting offer.

All-in-all, flat-rate processing is an OK fit for new or small businesses with low monthly processing volume.  Although it may be more expensive on a per-transaction basis, if there are no additional account fees it may be easier for a new or small business to manage.

Interchange Plus

Interchange Plus is calculated using the following formula:

Interchange + Discount Rate + Transaction Fee = Total Fee Per-Transaction

Interchange is a fancy word for the cost of the card which is set by the card brand such as Visa or Mastercard.  These rates are evaluated and changed twice a year in April and October.  Essentially, this is the fee that the card brands charge for accepting their cards as a business.  Regulated debit cards normally have the lowest interchange, while business and corporate credit cards have the highest.

The discount rate is part of the markup charged by the payment processing company.  This rate is normally based on your businesses monthly processing volume. Depending on your businesses monthly volume, discount rates normally range between 0.0% to 1.0%.

The transaction fee is also part of the markup charged by the payment processing company.  These fees normally range between $0.00 and $0.30 per transaction.  Again, this figure is normally based on your businesses monthly processing volume as well as the number of transactions you do per-month.

Interchange Plus pricing is normally the best pricing for brick-and-mortar businesses that take a lot of debit cards.  As we mentioned before, interchange rates on debit cards are among the lowest of all interchange rates.  That being said, the overall cost per-transaction would be significantly lower than a flat-rate processor

Tiered Pricing

Tiered Pricing is like flat-rate processing but has 3 different rates depending on the card.  The cards are split between Qualified, Mid-qualified, and Non-qualified buckets.

Qualified rates are usually for card-present debit and non-reward credit transactions.  These rates normally range from 1.5% to 2.0% plus $0.10 to $0.30 per transaction.

Mid-qualified rates apply to loyalty cards, rewards cards, and other manually keyed-in transactions.  These rates normally range from 2.2% to 2.9% plus $0.10 to $0.35 per transaction.

Non-qualified rates are for international cards, corporate cards, and other high-reward cards.  Card-not-present transactions also fall into this rate bucket.  These rates normally range from 3% to upwards of 4% plus $0.20 to $0.35 per transaction.

Tiered pricing varies based on your businesses monthly volume and is one of the ‘harder to understand’ pricing models.  Because of this, tiered pricing is on the least popular fee structures for business owners.  Additionally, processors can pick which cards go into what rate buckets which is a huge disadvantage to business owners.

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